Friday, March 9, 2007

The index markets gapped open strongly for the second session this week on the heels of a large scale reversal in the Yen vs. all its major counterparts. The reason behind the latest Yen move seems to be the rate hike in New Zealand to 7.25% will allow some of the favored carry countries to continue participating in the infamous lever trade. In response to this move in the Yen, the index markets rallied sharply overnight and continued their gains throughout much of a rather quiet session ahead of today’s February Employment Report released by BLS.

The report this morning came in right around consensus expectations on all levels…and that produced a sharp pre-opening bid in the marketplace. Currently the SPM7 contract is trading at 1424.50, which would equate to roughly 1410 in SP500 Cash index. Using the cash market, 1410 to 1415 should provide significant resistance in today’s session.

The real key behind today’s action will be whether or not the indices can hold their opening rounds of buying. Typically on Employment sessions, the move is fast and violent in the first hour, followed by a counter chop oriented trade. I suspect that will play out today, with one exception and that will be the final hour of trading. I expect to see selling across the index complex during that time frame…remember – since last Tuesday’s debacle, the final hour produced only 1 higher close. And that was a total of 0.30 points in the SPX market.

However we settle out today’s session, next week should provide fireworks as we enter the week of “witching.” There are lots of nervous positions on the books of hedge funds right now…and the fact that these bounces have occurred during overnight hours shows how much “supporting of positions” there continues to be in the marketplace. Next week should provide all the answers needed…if there is a forced liquidation trade during expiration week it will be very ugly. Keep in mind that last year we witnessed consecutive massive legs lower in May and June during their expiration weeks.

Thursday, March 8, 2007

Over the past week, we’ve seen a laundry list of extremes across a variety of shorter-term sentiment- and breadth-related indicators.

One of the more remarkable is that of the relationship between “up” volume and “down” volume on the NYSE. Up volume is simply the number of shares traded in stocks that closed higher than the previous close, and vice-versa for down volume.

Last Tuesday, that ratio was skewed 100-to-1 in favor of the downside, the worst since the crash of 1987. A week later, however, buyers returned in force and the skew was 15-to-1 in favor of upside volume. Historically, it’s rare to see two such opposite extremes within a week of each other, and it might be instructive to take a look at them.

Each of the four instances in the past 50 years was consistent in their pattern:

1. At least a 15-to-1 skew of down volume to up volume.2. At least a 15-to-1 skew of up volume to down volume less than one week later.3. A retest of the recent low within 30 days.4. A rally off a successful test of that low.

The four charts below highlight each of the occurrences, and it provides a general outline of what we may see this time around if the pattern holds somewhat true. This time we’re seeing the volume reversal soon after a market high, whereas the others occurred after a major downtrend, so that’s one caveat here. And if the recent low breaks, it will invalidate this pattern and I would not be looking for higher prices based on this extreme volume reversal any longer.

When the McClellan Oscillator gets below -200 a bounce is likely to materialize for the short term. The Summation index touched the -300 level on the current decline. We have labeled in the past where readings below -300 have produced rallies. Resistance lies near the 9300 which equates to the 1442 range on the SPX and may be the area where the next top forms. Next week is option expiration week which usually has a bullish bias and the SPX could rally into late next week. The bigger trend is down and we are expecting an intermediate term decline to take the SPX down to near the 1140 range. Also notice on the chart above as the NYSE made higher highs the Summation Index made lower highs and this negative divergence help pick out the top of March 2005 top, September 2005 top, May 2006 top and the February 2007 top. We are short the SPX at 1381.95.

Nasdaq 100 Market:

Below is the daily Nasdaq 100, ($NDX) chart.

The NDX McClellan Oscillator has hit into an area where short term lows have occurred in the past (check the NDX chart above). Therefore there is a good possibility the NDX may bounce during option expiration week which is next week. Resistance lies at the gap level that formed near the 1810 range last week. Gaps are like magnets, drawing the market to them. Therefore a possible bounce to the gap level during option expiration week is possible. If the gap at the 1810 range on the NDX is tested on lighter volume then that will create a bearish signal. If a bearish signal is triggered at the 1810 level on the NDX then that would be a good place to add to short positions. We hold an average short position on the Nasdaq at 2378.59. Our downside target on the Nasdaq is near the 1900 level.

Gold Market:On the recent decline that started from the late February high the energy has increased over 30% compared to the previous up leg going into the late February high and shows there is more force to the downside and implies the trend has turned down. For short term a bounce may materialize. On Market Vectors Gold Miners ETF (GDX), Resistance now lies at the gap level near the 41.30 range and our downside target is the 32 range. The anniversary of last years high comes in May. A lot of the time previous important highs and lows in the past mark important turn in the future. Therefore there is a possibility the market may hold down until the May time frame. The next major impulse wave up may start near the 32 on GDX and 115 range on the XAU. We are neutral on the XAU for now.

Wednesday, March 7, 2007

After a break in the overnight market the yen is now holding firm above 86.00 level in the futures market. There was a piece about the yen in Market News. Apparently State Street developed an indicator called the, “Japanese Yen Foreign Exchange Flow Indicator, or FXFI that makes a point that over the last six months the average short yen position established was 119.70. They assess the majority of yen shorts were probably put on above 118.00 (86.00 level in the yen futures) and,

“Thus institutional investors are significantly underwater, even when one takes into account positive carry. We believe that these accounts will use any rallies in dollar-yen to reduce their short yen exposure and limit further losses.”

It is interesting that State Street only goes back six months. The carry trade has been something that has been going on for years and most likely the level is closer to levels from Jan 2005 at the 105 level (98.00 level in futures) as Barbara Rockefeller discusses in the March issue of Currency Trader Magazine, The Yen: Canary in the Currency Coalmine (www.currencytradermag.com). I also suggest an article published yesterday in the Economist magazine called, The Yen also Rises (www.economist.com).

Assuming this is true, we are not close to breakeven levels and we would most likely see massive liquidation prior to that. Keep that on your radar.

Long yen positions are held with the next target level coming in at 88.43 (Upper Bollinger Band on JY H7 Weekly Chart).

The market bounced from an oversold condition yesterday and the retail public was reassured that all is well. SPY 140.50 represents horizontal resistance and SPY 141 is the 100-day MA, both should provide a temporary "lid". If the bulls can't add to yesterday's gains and make a new intraday high after noon CDT, I feel the bears will try to push the market lower into the close. Higher oil prices and the Beige Book (11:00 am PST release) could provide headwinds.

08:18:50 PST> Brad_Sullivan: Here is a few things I ran through this morning on the move and its magnitude:

From the summer lows, the Russell 2k rallied 20%ish and retraced that rally by 50% with the recent drop;

The SPX rallied +19% and retraced 37% of the move;

The DJIA rallied nearly +19% and retraced 25.5%;

The Midcap rallied +19.5% and retraced 43%;

Finally the NDX rallied 27% and retraced 35% of its move.

In a nutshell what took roughly 7 months to build crumbled in one week we may rally from here and hold serve above 1400 SPX for a stretch, but sooner or later, leg #2 is coming and my guess is that it will be as vicious.

Tuesday, March 6, 2007

The index markets are called to open sharply higher after reassuring comments from Treasury Secretary Paulson and a move lower in the Yen/Dollar carry trade. The bid began in earnest last night after a horrid final 30 minutes of trading across the index complex. Once again, each index settled below their respective cash instruments and fair value…however, strong bids began to enter the market moments after Paulson’s comments and the SPH moved rather quickly from 1373 to 1386 the European open. Since that time, the indices have treaded water between 1389 and 1382.50.

Today’s action should be defined by this gap open and whether or not there is any push towards filling it. If the indices are unable to hold higher levels we should see increased selling as the session wears on, particularly in the final 45 minutes…a stretch of time that has produced heavy one way street selling the last 2 sessions. If the indices are able to hold their opening bid, I would look for a sharp move higher that would carry the market above their respective highs from yesterday and test the breakdown level from Friday afternoon. In the SPH7 this would equate to roughly 1394 to 1396.

One aspect of the trade that I would put forward is this…we have moved DRAMATICALLY lower in 5 trading sessions. At some point we will get a bounce that sustains – normally that happens after a sharp down morning as the market reverses course in the afternoon. Given today’s gap higher, I have a hard time believing that this will be day we rally +2%...but you never do know.

After the brutal reversal yesterday and closing near the lows we are coming into calmer asset classes this morning. The dollar is reversing across the board and every single currency has moved contrary to yesterday’s wild action which has a “turn around Tuesday” kind of feel to it. Some are trying to say the carry trade unwind is over and all was accomplished in one week.I am not so sure about that as at 20 year lows on a trade weighted basis the yen seems undervalued while, on the other hand, the Australian and New Zealand dollar seem over valued and their growth expectations are moderating. More on this later.

Commodities continued their liquidation yesterday. Gold was off its recent highs of over $50 oz while silver had tumbled from a high of 14585 to a low of 12470. The base metals fell hard lead by nickel. However, after the close in the stock market my shortest term model went to a buy and as mentioned yesterday I expected a rally early in the week. Sensing a shift or possibly just worn out from going down, long positions were established in gold, silver, the mini S&P and mini Russell index. The market(s) are oversold on a short term basis as we had the 10 day moving average put to call ratio at a extremely high level. I still anticipate a sell off later, but for now I am testing the long side with break even stops. No hero here!

In the mini S&P today the 1379.00 is a pivot with 1389.50 my 1st resistance, then, 1392. A “point of control” which signifies the area where the most amount of activity occurred the prior day, is 1384.25. Support now is 1381.25, then, should we take out yesterday’s low, 1364.50 is the next support.

I continue to stay long the volatility plays established in mid February as I do not think the roller coaster is over.

Monday, March 5, 2007

The index markets continued to suffer on Friday as buyers failed to materialize at levels around unchanged for the second consecutive session. Sellers took control through the lunch trade and became aggressive in the final 30 minutes of trading. It struck me that most of the selling done during that period was of “forced” nature. Whether it be risk managers or margin clerks, the bosses did not want the weekend risk and pushed out longs. Given our lower open today, that seems like a rather prudent trade.

This morning, the indices are called lower, -800 in the SPH7 at 1377.75, but off its overnight trading lows of 1371. The real volatility this morning seems to be lurking in the currency market which is absolutely up for grabs depending upon which cross you are trading. The Dollar is markedly higher against nearly all its counterparts, save the YEN…the YEN/Dollar continues to sink, the change being about +1% in favor of the YEN this morning. On the flip side, the Dollar is up over +1% vs. the Pound and nearly +1% vs. the Euro…the one thing each currency has in common is that they are all SHARPLY lower vs. the YEN. To put this in perspective, 5 sessions ago, the Euro/Yen cross hit an all-time high. Currently, we are trading -5.3% lower from that mark. Certainly, any levered product moving so quickly has the potential to inflict serious damage across the markets. We have seen the response in our index markets as funds are forced to exit long strategies on equities and short yen positions…an ugly mix.

The question now becomes…where do we go from here? How much more damage is left in the system? Is there systematic risk in the marketplace and if so is that risk not being accounted for (in implied volatility) properly? These questions are the larger ones and whichever trading theme one takes in response will yield either a tremendous bout of profitability or a painful loss…of course that is the point for choosing this business.

One aspect of the trade that I try and remind myself of during this volatility is ANTICIPATION. I am reminded of the axiom that Bobby Knight used for his players…C.A.R.R.E. Concentrate Anticipate Recognize React Execute. Pretty simple stuff…but it works. In these markets many of the larger moves are actually quite orderly (Tuesday afternoon being an obvious exception). However, if you examine Friday’s action in the SPH7…we traded up to UNCHG at 1405 and eventually settled at 1385.75. Most of that action was steady selling with some spike program action involved…however, if you were selling low prints on the way down the market clearly tested your position, bouncing higher quite easily. The key with trading in this environment is to wait…wait until you see the “whites of their eyes” as one of my friends used to say.

The selling continues this morning as the Chinese government this morning has rekindled global slowing concerns. We have taken out last weeks lows and now are focused on China’s promise of increased regulation of banking and real estate as well as the possibility of additional interest rate hikes. We still have our usual suspects lurking in the background – carry trade unwinds, sub-prime home blues, and recession fears. With stocks, commodities and currencies falling across the board a question is circulating across the globe – is this a typical “healthy correction” where contagion kicks in as investors/traders liquidate positions across the board in all asset classes? Or does this have a different premise where the global macro backdrop of different asset classes is so highly correlated that a new paradigm is evolving which will threaten our beloved Goldilocks scenario?

“US demand has come in weaker than expected. Maybe the China story and the sub prime story are linked. The weakness in housing is going to cause real problems in the supply chain to the US consumer and that could be US small caps, or it could be in Asia. The saying these days is that the only thing that goes up when the market goes down is correlation.” --from FT.com article, Feb 28, titled: ‘Correlation rather than contagion’

People are now focused on concerns and until that changes, markets will stay under pressure. Now the hard questions are being asked concerning China and their murky accounting practices, their still stringent capital controls which defacto prevent an exit and the true rights and claims of so called Chinese shareholders (350 out of 500 of the largest listed Chinese stocks are still government owned). In addition questions regarding the private equity market (which is for the most part unregulated and unreported) and its size and risk to the overall banking and financial system are being asked. Not to mention the size of the carry trade unwind and derivative positions. I am not one to get to negative, but as I said last Wednesday we are trying to assess where real liquidity begins and leverage ends. It is a tangled web.

In the short term I expect a short covering rally perhaps early in the week and then further weakness in the equity markets. My shortest term model is getting close to a buy signal and we have the put to call ratio now at a high level. Intraday ranges should continue to be wider than what we became accustomed to and volatility will continue to move higher.

I watched Master and Commander (for the 3rd time) over the weekend and there is a classic scene when the ship is under attack and a small boy is crouching with fear. The Captain pulls him up and says, “stand tall in the quarterdeck,” meaning, be present and responsible. Heading into the week listen carefully to what the market has to say, respect the charts, preserve your capital and trade only with good risk/reward scenarios.

Sunday, March 4, 2007

Given the high readings we have empirically observed in our Volatility Indices during the last week, for market timing purposes, go to CASH for a minimum of two weeks -- past the March Quad-Witching Options Expiration (Friday, March 16th) and the Vernal Equinox (March 21st, 00:07 GMT).

Market participants should expect massive vol expansion at or near the March Expiry, while historically speaking, both Vernal & Autumnal Equinoxes, plus or minus 1 to 2 days, have often been a time for key reversal days in the equity markets.

First, let's review our 'new & improved' Timer Chart.

While a -222 reading on McClellan Oscillator for NYSE and a -196 reading for NASDAQ's sounds like a good buying opportunity, we are mindful of recent outlier events for VIX (see my Feb 28 post titled, "Volatility -- My Two Cents").

Part of the reasoning here is for us to wait and observe the strong vol retest we expect both in magnitude and Sigma Channel position. That event should complete before the month end. This is also in line with the talk Sherman McClellan gave at our last meeting of LA Chapter of MTA, which met on January 30th in Seal Beach, CA.

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Fari Hamzei is frequently quoted by Benzinga, StocksNJocks, CNBC, Bloomberg, FoxBusiness and RealMoney. His book, Master Traders: Strategies for Superior Returns from Today’s Top Traders, published by John Wiley & Sons in October 2006, immediately become a bestseller on Amazon trading books space. Three times, Fari has been the featured advisor on Timer Digest monthly newsletter when each time he was ranked FIRST in the Nation for the previous 12 months among 150 market timers. More recently, in August 2015, he was ranked SECOND in the country, then moved to FIRST place in October 2015. In December, he briefly was ranked SECOND and since first week of January 2016, he has been ranked ONE in the Nation till present.

From 2006 to 2011, once or twice per year, Fari has taught his Proprietary Sentiment Indicators at The Options Institute of CBOE. And, he often shares his methodology on CBOE Options Hub.

Fari is a graduate of Princeton University with a BSE degree in financial engineering, and studied financial derivatives with Options Theory luminaries such Jack Shelton, Ed Thorp, Robert Geske, Richard Roll & Robert Whaley (inventor of original VIX) at UCLA Anderson Graduate School of Management. He was manager of the Operations Analysis Dept and then was promoted to the director of Strategic Planning at Northrop Grumman Corporation's Aircraft Group after being recruited only 5 years earlier from college. He also served for eleven years on the Board of Directors of Electronic Clearing House (ECHO), now an Intuit company (INTU).Read Fari's Recent PostsBrad Sullivan is a member of both MERC & CBOT Exchanges, and trades for his own hedge fund in Chicago. His comments posted in our HFT Premium Chatroom, is read each day by many active index, debt and commodity futures traders.Read Brad's Recent PostsMark "SPO" Esposito aka The Admiral, has traded as a sole proprietor and as a partner in the Designated Primary Market Maker (DPM) structure at the CBOE for 27 years. During the late 80’s “SPO” was regarded as one of the most active and largest traders on the CBOE Floor. Experiences like trading the crash of 1987 and the tech bubble burst of 2000 proved invaluable in understanding option volatility. Extending those experiences in mentoring of many individuals helped develop many successful traders during his tenure. While serving in the CBOE committee structure he was integral in the CBOE transition from open outcry to hybrid (open outcry + remote market making). He was then recruited by OneChicago as its Managing Director of Business Development. After 12 years at OneChicago, in mid-December 2015, he joined HA to run our HFT Options Trading. Today, strategy and trading analysis are part of his many active roles.
Michael Blythe's trading experience began at the beginning of the 2nd Iraq War in 2003 as an intern for an institution on the AMEX floor that would later become part of Charles Schwab. From there he became responsible for hedging an agricultural operation until 2008, when a month before the Lehman Brothers fall, he accepted a role to manage fixed income trading for an 'accredited investor' trust which periodically took him to the CBOT floor to work with seasoned strategists. Since then he has gained education and experience working with one of the featured traders in the Market Wizards series and is currently completing a degree from the London School of Economics.Read Michael's Recent PostsPirouz Hendi graduated from California State University Fullerton with a BA in Business Marketing. Pirouz started his career in the financial industry at Prudential Securities in 1999 as a licensed Stock broker after successfully completing series 7, 63 and 65 securities exam up until 2003. Pirouz has been an independent trader in the equities market since 2007 with primary focus on individual stocks and ETFs. Pirouz has successfully completed the beginner level of CBOE option courses and is planning on completing their intermediate and advanced level courses as well.
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Read Jeffs's Recent PostsFil Zucchi is the founder and manager of Zebra Investment Advisors LLC, a Virginia registered investment advisor, and Zebra Fund, LLC, a long/short hedge fund. Before founding the Zebra companies, Fil managed individual long/short accounts. Prior to that, he was a bankruptcy and commercial litigation attorney in a Washington, D.C. law firm. Fil was a contributor to theStreet.com Street Insights. Fil is also currently involved in his family’s commercial real estate development and management operations.Read Fil's Recent PostsDavid Miller, a contributor to Master Traders, is the CEO and co-founder of Biotech Stock Research, LLC, publisher of Biotech Monthly. Launched in October 2001, Biotech Monthly combines a monthly newsletter format with alerts on breaking news on more than two dozen development-stage biotechnology companies under coverage. His firm is one of the few independent research firms in that it accepts no money from the companies it covers, does no outside consulting in the biotech space, runs no mutual or hedge fund, and is 100 percent subscription-supported. In addition, David was CEO of a successful technology company and a university professor.Read David's Recent PostsFrank Barbera, CMT, a contributor to Master Traders, is a co-manager of the Caruso Fund, a $35 million hedge fund that seeks to make gains trading precious metals, stocks, and currencies. He began his career in the early 1980s working with John Bollinger, Bill Griffith, and Susan Herrera at Financial News Network in Los Angeles. After FNN, Frank spent 10 years as an on-air market analyst for KWHY-TV in Los Angeles. His first money management position was at the Kavanaugh Fund in Santa Monica, a hedge fund subsidiary of Goldman Sachs. His technical work in gold and gold stocks is considered among the best in the industry.Read Frank's Recent PostsTim Ord, a contributor to Master Traders, is the president, editor and publisher of The Ord Oracle, established in 1990, which is an electronic advisory newsletter that recommends S&P, NASDAQ, and gold stocks trades. He is frequently listed in the top 10 market timers in the country. Timer Digest ranked Tim No. 5 in gains for the S&P and No. 2 for gold timer in 2004. He has more than 25 years of trading experience and placed fourth nationally in the option division in the United States Trading Championship in 1988.Read Tim's Recent Posts